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Avoiding Bad Debt

At one point or another in our lives we need to go into debt. Whether it’s to buy a car or buy a house, certain events in our lives requires us to borrow money in order to achieve our goals. It’s important to understand that there is good debt and bad debt. Of course the most logical thing is to avoid bad debt.

Payday Loans

If there was ever a way to legalize loan sharks and put them at the corner store this would be it. Interest rates on payday loans are downright criminal. Most interest works on an annual rate, payday loans work on the full amount of the loan per month! If someone borrows $100 using a payday loan, a borrower could be on the hook for $21 of interest per month! That’s not including service fees and charges that may also be incurred. If someone lived in Ontario, Canada where the cap is set to 21% per two week period. An individual would be paying the equivalent of 546% annual interest rate. Doesn’t that sound ridiculous to you?

Credit Card Debt

This is everyone’s favourite kind of debt. It’s so easy to buy something by just swiping or tapping a card. It’s a known fact that most individuals will make purchases on the spot and spontaneously rather than planning it out. The ease in which a credit card can be used leads to abuse and ultimately very expensive debt. Credit card interest rates are astronomical compared to other debt instruments issued by banks. Not only are the rates high, but very often the banks won’t ever explain how the interest rate works. Generally the posted rate is for the annual percentage rate, but the reality is interest is charged on the first day that a purchase is made and compounded on a daily basis. Once a payment is missed, watch out!

Paying 20% interest rate on debt is absurd. Credit cards are an easy way to perpetually fall into the trap of being “owned” by the bank. If you think that the stock markets are a ponzi scheme and the corporate dogs are out to get you, using credit cards to sustain a living is essentially creating your own ponzi scheme. Eventually that pile of debt will collapse on you.

Car Loans

Oh geez, is that clunker still running in the garage? Car loans are inevitable, but getting a car loan that extends out 7-8 years is ridiculous. At that point in time, the car might even be more expensive to maintain on a yearly basis than the actual car payments themselves. Does it even make sense to be owing money on a vehicle that’s nearing the end of its lifespan? Though cars in general will last almost 11 years now, very rarely is the original owner still driving the car. Most will want to get out of their cars once problems happen, but having a car loan that is outstanding makes it extremely difficult to sell the car. Moral of the story: Keep your car loans shorter.

HELOCs

Buying a home is a great way to force yourself to save. The only unfortunate downside to owning a home is that cash flow starts to dwindle with mortgage payments, taxes and maintenance fees. Home owners are always tempted to draw upon the value of their home to support their every day needs. This bad practice should be stopped. A house is something that a family lives in, not a bank ATM. Using the home as collateral for vacations, vehicles, or new wardrobes sounds worse than jumping into a pool of great white sharks. The fact is the money still needs to be repaid. A home equity line of credit was a terrible financial instrument created by financial institutions to further enslave home owners with perpetual home payments.

Student Loans

Ever wonder if that PHD or MBA really paid off? It only delayed the start of a career or further put the individual into student debt that could never be repaid. It’s great to get a further education, but the unfortunate fact of life nowadays is whether or not that degree will make a difference once it is obtained. Students in America have amassed over $1 trillion in student debt. I’m sorry to break hearts and dreams, but some degrees are made better than others. The unfortunate fact is that a proper return on investment should be made prior to going into any post secondary education. The fact remains that expensive degrees don’t equate to well paying jobs. Some jobs require only vocation studies, that can be taken for a fraction of the cost of a degree, but the bad social stigma of those jobs are what’s keeping individuals from doing them.

Executive degrees are even worse. Does it really get you ahead in the game? The opportunity cost of a 6 figure tuition and 2 years of lost salary far outweigh the benefits that an executive degree can earn. How much more does that degree put you ahead? Are you guaranteed a fortune 500 CEO position coming out? How long will it take to make up the lost salary and tuition? I think the real question of executive degrees is how much is one willing to pay to make new friends in high positions?